I have a client who is a big OU Sooner fan. I mentioned to him my hope that OU would stand a chance against the heavily favored Alabama Crimson Tide to which he responded in jest, "I hope you aren't putting MY money on an upset." After the game I could not help but see the parallel to this year's outcome and how people actually think about investing for retirement.
"I went to cash because..." Fill in the blank. This is a common phrase uttered by market pundits, advisors, and amateur investors everywhere. And there always is a seemingly very smart reason to justify putting your investments in cash instead of the market. However; what appears on the surface to be a good investing idea often stands in sharp contrast to the actual results.
If you are a human and an investor there is good news and bad news. The bad news first. Your brain sucks. It operates in almost every way possible to encourage you to make bad investing decisions. It is also why you care a lot more about the Fed’s actions than you really should.
A test will easily demonstrate your faulty brain at work.
There has been much discussion lately on the reliability of the suggested 4% withdrawal rate. It has long been held that withdrawing 4% from your retirement assets per year was a “safe” withdrawal rate. “Safe” means if the retiree starts taking 4% out of their portfolio when they retire and increase that amount by inflation each year then that income will last them the rest of their life. 4% became a rule-of-thumb even though it actually has strong academic backing. Recently, however, online articles and general advisor talk have suggested that given the current low rate environment or due to big market collapses like 2008 and 2009 a 4% withdrawal rate is no longer feasible.
The stock market recently surpassed two very meaningful price points. The Dow Jones surpassed 14,000 and the S&P 500 reached 1,500 for the first time since 2007. Many people are now starting to wonder whether we are “due for a correction” or are we at a market peak. As I write this article the market indeed has pulled back from these highs. But what, if any, influence should these index levels have to do with investing long term?
I think there are at least a few important questions to consider when this type of thinking creeps into our heads.